Bankruptcy and Inheritance Concerns

If you’ve recently filed for bankruptcy, beware: did you know that receiving an inheritance of either cash or property within six months after your filing may make that property subject to your bankruptcy, too? This is a little-known fact of bankruptcy law that can, if you’re not careful, put you in a very complex financial bind.... therefore, it is essential to understand the bankruptcy inheritance rules.

Bankruptcy Inheritance Rules

In a situation where someone has filed for bankruptcy up to 180 days prior, the notification of an inheritance received is required, by law, to be included within the bankruptcy filing. It does not matter whether the person knew the inheritance was coming or not; nor does it matter if he or she will not actually receive anything from the inheritance for long into the future. The notification of the incoming inheritance is enough for the bankruptcy courts to require the information be passed onto them, and the consequence may be a change to your bankruptcy provisions.

• If you filed a Chapter 7 bankruptcy, the inheritance will be put into the hands of the trustee, and, when it is eventually paid out, it will be used to pay off your discharged debts. Any exemptions in place that may protect certain amounts of it can help, but if there are no exemptions, you will likely see all of it go straight out to the creditors. 
• In a Chapter 13 bankruptcy, the inheritance will most likely cause an amendment to your existing payment plan; the amount you pay each creditor, or the number of creditors on the plan, may increase in proportion to the amount you expect to receive. This may not be subject to actually take place until the inheritance is eventually paid out, but the paperwork will be amended immediately upon official notification that the money or property is intended for you. 

It may seem unfair, since most of us aren’t aware that an inheritance is on the way: death of a loved one is hardly predictable, and even if it is, we don’t necessarily know if we are included in someone’s will or not. Unfortunately, too many people who do know an inheritance is coming choose to file bankruptcy prior to its arrival, so that they can avoid having to use that money to pay off creditors. This has resulted in the provisions explained above. The six-month limitation is in place because of the theory that, outside of six months, it’s fairly safe to assume you didn’t know about the inheritance and thus it can’t fairly be included in your bankruptcy.

Getting Help 

If you know an inheritance may be on the way, speak to a bankruptcy lawyer before making any moves on filing for bankruptcy. Even if you're unsure about whether or not you will receive anything, it may be better to be safe than sorry, and finding a way to put off the bankruptcy in the meantime could end up saving you your entire inheritance being lost later down the road.